WILLS AND TRUSTS - Santa Clara Law



. WILLS AND TRUSTS

. CH. 1 INTRO TO ESTATE PLANNING

The Power to Transmit Property at Death: Justification and Limitations

- Until the 1980s, the views of Jefferson and Blackstone prevailed over those of Locke. SC held in Irving Trust Co. v. Day (US 1942) that rights of succession to property of a deceased are of statutory creation and that the Constitution did not forbid the legislature from controlling the power of testamentary disposition over property within its jx. Any right to devise (to will inheritance) or descent (to receive inheritance) was not seen as a natural right, but rather a statutory right, agreed upon by a social contract—a creature of municipal law.

- John Locke, in his treatises, argued that the right to devise and descent is a natural right.

- Support for inheritance: promotes diligence, people can control their heirs by including/excluding them from their will, least objectionable system, abolishment of inheritance wouldn’t solve the inequality problem because cultural inheritance is the real problem—children benefit more from education, health, etc. than money

- Criticism of inheritance: supports a class system, works against diligence for heirs, kids should be treated well during their lives (health, education, etc.) rather than left with a large inheritance

- Alternative: tax inheritance with high estate taxes

← At the current rate, there will be no estate tax by 2010; future depends on politics

← One could argue that such a restriction (tax) goes too far or is unreasonable (In Babbot case within Hodel v. Irving, Congress could not restrict to whom the decedent can will his land—see below).

- Old common law: inheritance went to family (forced succession of land); there was no right to leave a will

- In 1918, the communist Soviet Bolsheviks abolished inheritance; proved disastrous and was reinstated 4 yrs later

- 3 ways to transfer property at death

← (1) will

← (2) intestate succession

← (3) will substitutes

- Hodel v. Irving (US 1987)

← Indians had communal reservations, but no right to devise prior to the 19th century Land Acts. The Land Act created an individual allotment system w/o the right to devise; right to devise was given in 1910

← After 1910, allottees of Indian land were permitted to dispose of their interests by will in accordance with regulations. The policy of allotment of Indian lands was disastrous for the Indians because there were too many owners of their land and the bookkeeping was too expensive to allow for profit.

← Congress ended further allotment of Indian lands with the Indian Reorganization Act of 1934. This did not solve the problem since it was not retrogressive; current owners were allowed to further allot the land because they were allowed multiple heirs.

← Indian Land Consolidation Act of 1983 § 207 escheat provision provided that land that was less than 2% of the total tract and provided a profit of less than $100 to the owner the year before devisement, would escheat to the tribe rather than descent or devise. There was no compensation provision for owners. This constituted a total abolition of both the descent and devise of the particular land.

← Appellees, potential heirs of the land, claimed § 207 was a taking w/o just compensation. The DC held the statute was constitutional. The 8th Cir reversed, holding the statute violated the 5th Am. SC affirmed, holding the statute unconstitutional.

← A complete abrogation of the right to transmit property at death goes too far; there must be just compensation for this sort of taking. The right to devise/descent is a constitutional right.

- Weighing in favor of the statute: Decedents were allowed to use the property during their lifetimes and make intervivos transfers. It was doubtful that the decedents had investment-backed expectations in passing on the property. The Appellees were members of the tribe, so there was somewhat of an “average reciprocity of advantage” since the escheat would benefit the tribe. Also, there are other ways to transfer property at death (gift, remainder interest with life estate in oneself, revocable trust, etc.). Nevertheless, this was still a taking w/o just compensation. These reasons do not provide adequate compensation equal to the right to transfer at death.

- § 207 did not interfere with the right to use the land, transfer it inter vivos, or the right to build on the land. O’Connor suggests that the right to devise/descent is a separate, identifiable stick in the bundle of rights called property.

- Court focused on the right to devise (give property by will), not descent (inheritance).

- Concurrence: Substantive due process issue

- Congress can, however, abolish certain heirs after this case.

← Hypo: Say there was a law passed that allows for a property owner to will land only to other owners of fractional allotments. This would be a taking because it is an unreasonable restriction. It is unlikely that one of the other fractional owners would be a descendent of the decedent.

- To what extent should a person be able to use wealth to influence behavior after death (the “dead hand” problem)?

- Restatement 3rd of Property: Wills and Other Donative Transfers (WODT) § 10.1 Donor’s Intention Determines the Meaning of a Donative Document and is Given Effect to the Maximum Extent Allowed by Law

- The controlling consideration in determining the meaning of a donative document is the donor’s intention. The donor’s intention is given effect to the maximum extent allowed by law.

← Rationale—freedom of disposition; donors should be allowed to dispose of property as they please

← Intent determines the meaning and effect of donative document

← Wisdom, fairness, or reasonableness should not be questioned

- Restrictions on donative transfers: interference with spousal rights or creditors’ rights, unreasonable restraints on alienation or marriage; provisions promoting separation, divorce, or family strifes; impermissible racial or other categoric restrictions, provisions encouraging illegal activity, and the RAP and accumulations

- Shapira v Union National Bank (Ohio Court of Common Pleas 1974)

← David Shapira left his fortune to his 3 kids. According to the will, his 2 sons would only inherit the fortune if they married a Jewish girl whose parents were both Jewish within 7 years of his death. Otherwise, their part of the fortune would go to the State of Israel. Plaintiff, Daniel Jacob Shapira, was a son of David Shapira and challenged the validity of the condition. Daniel was 21 yrs old and unmarried when his father died. He requested declaratory relief.

← Daniel’s legal arguments:

← Daniel argued that the condition violates his right to marry under the 14th Am. Loving v. Virginia—SC held unconstitutional an antimiscegenation statute under which a black and white person were convicted for marrying; “restricting the freedom to marry solely because of racial classifications violates the central meaning of the Equal Protection Clause.” However, the right to marry is constitutionally protected (14th Am) from restrictive state legislative action. P argued that under Shelley v. Kramer (involving city ordinances), the state’s enforcement of the will condition consisted of a state action restricting the right to marry. Held: the court is enforcing the testator’s restriction upon his son’s inheritance; does not constitute a state restriction on marriage. The will provision was valid because there was no restriction on marriage, only on inheritance.

← Daniel’s public policy argument: conditions on inheritance cannot encourage divorce or separation and unreasonable (but not reasonable) partial restraints of marriage. Gifts conditioned up on the beneficiary’s marrying within a particular religious class or faith are reasonable. This condition was reasonable because P did not demonstrate a lack of Jewish girls in his county, and it’s easy to travel in modern times.

← Nor was this a restraint on religious freedom. The condition, operating only on the choice of a wife, was too remote to be regarded as coercive of religious faith.

← Maddox v. Maddox (Virginia 1854)—testator willed remainder to niece if she remained a member of the Society of Friends, but to do so she had to marry one of 6 particular men or go abroad to find a mate; this was found to be an unreasonable restraint on marriage and the condition was voided from the will. This case does not demonstrate an unreasonable restraint such as the one in Maddox.

← Daniel argued the condition encouraged him to marry for the inheritance then divorce afterward; court found the possibility too remote.

← Daniel argued that the condition by pressuring him to marry within 7 years without opportunity for mature reflection and jeopardized his college education; court held that this is no more of a blackmail than a living gift or conveyance upon consideration of future marriage, which has been held valid.

← Provision providing for benefit of State of Israel further illustrates the father’s intent.

← Held: Valid condition and reasonable restraint on marriage.

← A will cannot impose an unreasonable restraint on marriage.

- Posner says that the dead hand cannot react to changed circumstances or even compromise. Therefore, this is the perfect place to apply the doctrine of cy pres (as close as possible) to conditions on wills. The court should be able to modify the condition to meet the circumstances unless the testator expressly rejects such judicial modification.

← What if Daniel was gay? No courts have recognized a constitutional right to stay single.

- Rest 2nd of Property: WODT § 6.3

← A restraint to induce a person to marry within a religious faith is valid iff, under the circumstances, the restraint does not unreasonably limit the transferee’s opportunity to marry.

- The restraint unreasonably limits the opportunity to marry if a marriage permitted by the restraint is not likely to occur. The likelihood of marriage is a factual question depending on the circumstances of the case.

- § 7.1—A will or trust provision is ordinarily invalid if it is intended or tends to encourage disruption of a family relationship.

- Destruction of property at death

← A person can destroy her property during life unless it is subject to historic preservation or similar laws.

← But, in Eyerman v. Mercantile Trust Co. (Missouri), an executor could not destroy a house as requested by the testator because “a well-ordered society cannot tolerate” waste.

← Should a testator be able to destroy property at death when the main economic loss is visited upon others?

- Rest 3rd of Trusts § 29c (2003) invalidates trusts that are contrary to public policy.

← Frowns upon restraints on beneficiary behavior, including restraints on marriage or religious freedom, disrupting family relationships, and choice of careers, but calls for balancing of conflicting social values.

Transfer of the Decedent’s Estate

- All the decedent’s assets at death are either probate or nonprobate property.

- Probate Property = property that passes under the decedent’s will or by intestacy

- Nonprobate Property = property passing under an instrument/method other than a will or by intestacy. Most property is transferred at death outside of probate.

← Joint tenancy property, both real and personal (e.g., bank accounts, brokerage and mutual fund accounts, and real estate). No interest passes to the survivor at death because the survivor has the whole property relieved of the decedent’s participation.

← Life insurance proceeds of a policy on the decedent’s life are paid by the insurance company to the beneficiary named in the insurance K.

← Contracts with POD provisions. A decedent may have a K with a bank, employer, or some other person or corporation to distribute the property held under K upon death to a named beneficiary (e.g., IRAs, pension plans, Keoghs, stock custodian accounts held in a brokerage firm).

← Interests in trust. Property is distributed to the beneficiaries by the trustee in accordance with the terms of the trust instrument. May be revocable/irrevocable. If the decedent has a testamentary power of appointment over assets in the trust, the decedent’s will must be admitted to probate, but the trust assets are distributed directly by the trustee to the beneficiaries named in the will and do not go through probate. Normally, the distribution of assets in a trust is nonprobate.

- Settlor (equivalent to a testator) gives legal title to a trustee (equivalent to a devisee) and equitable title to a beneficiary. The beneficiary has equitable rights against the trustee, which he can defend in court.

- A trust allows one to split title.

- Hypo: A = settlor, x = trustee, S = beneficiary = A’s son. A gives “income for life to A, on A’s death to Son” in trust.

- Possible to create a trust which gives power of appointment to a beneficiary. Testamentary power of appointment allows the settlor to say who is a beneficiary in his will. A trust which gives the testamentary power of appointment to the settlor is nonprobate property, but the will must go through probate. The assets in the trust, however, go directly to the beneficiary without going through probate.

- Personal representative oversees the winding up of the affairs of the deceased (inventory, collecting assets, managing assets, pay creditors and taxes

← Executor if named in the will; will should name an alternate executor

← Administrator if not named in the will; appointed by court according to hierarchy (spouse/registered domestic partner in CA (CPC 8461A), kids, parents, siblings, creditors).

Administration of Probate Estates

- When probate is necessary, the first step is to appoint a personal representative to oversee the winding up of the decedent’s affairs. Principle duties include:

← (1) inventory and collect the assets of the decedent;

← (2) manage the assets during administration;

← (3) receive and pay the claims of creditors and tax collectors;

← (4) clear any titles to cars, real estate, or other assets;

← (5) distribute the remaining assets to those entitled.

← A personal representative appointed by the will is called the executor. The personal rep appointed by the court is called the administrator. The administrator is selected from a statutory list, usually: surviving spouse, children, parents, siblings, creditors. Personal reps are appointed by, under control of, and accountable to the court. The personal rep (unless it is a corporate fiduciary as executor) must give a bond.

- There is one probate court per county.

- A person dying testate devises real property to devisees and bequeaths personal property to legatees. The Restatement of Property applies “devise” to both realty and personalty. “I give” suffices to include “I devise” and “I bequeath.”

- When intestacy occurs, we say property descends to heirs; personal property is distributed to next-of-kin. Today, in almost all states, a single statute of descent and distribution governs intestacy. The same persons inherit personal and real property. Thus, we use the term “heirs” for all intestacy.

Probate Procedure

- Open Probate

← Governed by statutes and court rules giving meticulous instructions for each step in the process

← 3 functions of probate: (1) provides evidence of transfer of title to new owners; (2) protects creditors by requiring payment of debts; and (3) distributes the decedent’s property to those intended after decedent’s creditors are paid.

← Primary/domiciliary jx—will should be first probated in the jx where decedent was domiciled at death

← Ancillary jx—will should then be probated in any other jx where real property is located.

← Detailed statutory procedure for issuance of letters testamentary (letters of administration)

- Letters testamentary = a document issued by the court clerk which states the authority of the executor of an estate of a person who has died. It is issued during probate of the estate as soon as the court approves the appointment of the executor named in the will and the executor files a security bond if one is necessary (most well-drafted wills waive the need for a bond). Certified copies of the letters are often required by banks and other financial institutions, the federal government, stock transfer agents or other courts before transfer of money or assets to the executor of the estate.

← Can be ex parte probate (informal probate) or notice probate (formal probate). The person asking for letters can choose formal or informal.

- Most jxs do not permit ex parte proceedings and require prior notice to interested parties before the appt of a personal rep or probate of a will. CPC 8005 requires 2 interested parties before a will can be executed.

← A formal proceeding may be used to probate a will, block an informal proceeding, or secure a declaratory judgment of intestacy; becomes final judgment if not appealed.

← UPC 3-108. Probate SoL—No proceeding, formal or informal, may be initiated more than 3 yrs from the date of death. Intestacy is then presumed.

- This changes common law, which permitted probate at any time.

← Creditors

- Every state has a statute requiring creditors to file claims within a specified time pd (nonclaim statutes). Due Process requires that known or reasonably ascertainable creditors receive actual notice before they are barred by a short-term statute running from the commencement of probate proceedings. A 1-year SoL running from the decedent’s death, barring creditors filing claims thereafter, is constitutional even without notice to creditors. The SOL is usually 2-6 mos. after notice to creditor.

- CPC 9050—personal rep must give notice to creditors. 9052 contains form for notice. 1215 contains instructions.

- Personal reps may be personally liable to creditors; creditors cannot recover from other creditors or distributees unless they were required to give notice to the creditor.

← Will Contests

- CPC 6104—The execution or revocation of a will or a part of a will is ineffective to the extent the execution or revocation was procured by duress, menace, fraud, or undue influence.

- The period of limitations for filing a will contest is ordinarily jurisdictional and is not tolled by any fact not provided by statute; usually 1 year after probate.

- In CA, an undue influence action must be brought after letters issued and before the final distribution of the estate (CPC ?).

- Supervising the representative’s actions

← In many states, the actions of the personal rep are supervised by the ct, which must approve all the rep’s actions. In some states, the personal rep handles the matters informally w/o court order if the parties are adults, approve the fiduciary’s account, and release the fiduciary from liability.

← The UPC authorizes unsupervised administration but allows for supervised administration if any interested party demands it (UPC (1990) §3-1003). In unsupervised administration, the rep has broad powers. §3-715. The estate may be closed by the rep upon filing a sworn statement that all duties have been finished. §3-502.

- Closing the Estate

← Completion of administration and distribution of assets should be finished asap.

← Creditors must be paid, titles cleared, taxes paid and tax returns audited and accepted by the appropriate authorities, and real estate or a sole proprietorship may have to be sold.

← Judicial approval is required for the rep’s release from liability and fiduciary duties.

Is Probate Necessary?

- Expensive and time consuming

- Heavily taxed—federal tax on estates begins at $2 million; attorney fees run from 1.3-5% of the estate

- Can be avoided with a joint tenancy, trusts, or contracts (similar to a trust).

- Difficult to avoid at least some probate for large estates

- Small items like furniture do not require probate, but for items that need papers like a car or house, ownership must be proven upon purchase.

- Statutes in some states permit filing a will for probate solely as a title document, with no formal administration to follow. In some states, title insurance companies will insure real property sold by heirs if a certificate of death and affidavit of heirship is filed; probate proceedings are not required.

- Close Relatives, Small Estates

← Many states permit close relatives of the decedent to obtain possession of his personal property by presenting an affidavit to the holder of the property if the estate does not exceed a certain figure. The figure defining a small estate, which can be collected upon affidavit, ranges from $5K to over $100K.

← CPC 13100—for estates ................
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